Family businesses are doing better than rest of India Inc

Family businesses have earned 14% annualised returns between January 2017-2020 on the stock exchanges.

Family businesses have earned 14 per cent annualised returns between January 2017 and January 2020 on the stock exchanges. In the same period, the sample of 2,770 professionally-run companies and India Inc gained 12 per cent and 13 per cent, respectively.

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There is a reason why they call it family silver. The ET Intelligence Group’s analysis of the publicly available data of 884 listed family-run enterprises reveals that they have earned slightly higher returns than the overall sample of India Inc as well as that of the professionally-run businesses.

Family businesses have earned 14 per cent annualised returns between January 2017 and January 2020 on the stock exchanges. In the same period, the sample of 2,770 professionally-run companies and India Inc gained 12 per cent and 13 per cent, respectively.

The aggregate market capitalisation of family businesses is at around Rs 65 lakh crore which is an average of the market cap for January 2020. This was 42 per cent of India Inc’s total market cap of Rs 156 lakh crore. The Tata Group (market cap of Rs 11.8 lakh crore) and Mukesh Ambani-led Reliance Industries (Rs 9.4 lakh crore) were the second and the third largest business groups in the country after HDFC group (Rs 12.4 lakh crore), which has been professionally managed for over two decades.

The current composition of the benchmark indices includes a majority of family-run companies. The Nifty50 has 31 family-run companies and the S&P BSE Sensex has 16. They contribute 52 per cent and 49 per cent to the market cap of the Nifty and Sensex, respectively, thereby highlighting their pivotal roles in cultivating investor culture.

One would wonder how these family-led businesses fared individually. To that effect, a further slicing of data shows that one out of nearly every three business families reported higher returns than Sensex's 15 per cent returns based on 3-year compounded annual growth rate (CAGR).

On the financial front, the sample of family businesses clocked Rs 24 lakh crore in revenue and Rs 1.8 lakh crore in net profit in FY19.

They contributed one-thirds and one-fourths to India Inc’s total revenue and profit. Moreover, the annualised growth rate of sales and profit for the family-run companies at 10 per cent and 15 per cent was marginally higher than that of 9.5 per cent and 7 per cent for the larger sample in that order.

In line with the findings of PwC India’s Family Business Survey 2016, 76 per cent of Indian family businesses have shown growth in the last 12 months as well, which is higher than the global average of 69 per cent. Further, 58 per cent have achieved double-digit growth, which is significantly higher than the global number of 34 per cent, said PWC in their latest study from 2019.

“Family business leaders have told us they will fund this growth through bank lending and credit lines along with internal sources, namely cash flows, family funds and so on. More than half also said they will explore private equity/venture capital funds as an option or will look at listing on a stock exchange,” said Ganesh Raju K, partner, PWC.

The wariness to seek public or institutional capital is also changing and PE capital has acted as a catalyst to change perceptions among founders. “It is not surprising that 56 per cent of family businesses say that they will be looking at bringing in PE funding for the business.

Moreover, 17 per cent of family businesses mention they will consider procuring funds from other families or through family offices. Usually, this signifies crossholdings between related families/friends; however, lately, a key emerging trend is procurement of funds through multifamily offices,” adds Raju.